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Bond
Analysts Give Best Advice
Seasoned
investors have learned to take stock analysts advice with a grain of
salt, and for good reason, since many analysts have given bum advice in
recent months. However, there is one type of analyst—those that rate
corporate debt—that shouldn’t be ignored.
The
distinction between research done by stock analysts vs. credit analysts
was thrust into the limelight last June when Lehman Brothers credit
analyst Ravi Suria advised investors to avoid Amazon.com’s convertible
bonds (bonds that can be exchanged for shares of common stock under
specified conditions) because Suria feared the online bookseller was in
danger of defaulting on the bonds. Suria’s advice was in stark
contrast to that of most stock analysts, who were urging investors to
buy Amazon shares, then trading in the $40 range. Suria must have been
on to something, since when I looked last week, Amazon’s shares were
trading in the $10 range.
The Amazon
episode highlights the difference in the way bond and stock analysts
approach their jobs. Stock analysts, at least those we see quoted on the
Web and in the media, are mostly interested in growth prospects, and don’t
worry much about a company’s financial health.
Bond
Analysts Take a Different View
Bond analysts, on the other hand, focus on a company’s ability to
service its debt. They evaluate a company’s financial statements,
management quality, the competitive environment, overall economic
conditions, etc. Where stock analysts tend to be over optimistic, bond
analysts are inclined to error on the side of caution. Bond analysts’
ratings and reports are arguably the best source of objective company
research available to individual investors.
While some
bond reports come from analysts employed by brokerage houses such as
Suria, most are produced by independent bond rating agencies, the major
ones being Moody’s Investors Service, Standard & Poors, and Fitch.
Bond &
Credit Ratings
The bond rating determines the interest a company will have to offer to
entice investors to buy its bonds, and are expressed using a combination
of letters, numbers, and plus or minus signs such as AAA, BA1, B- and
the like. The combination of symbols used by each rating service varies
somewhat, but “AAA” always indicates the highest quality rating, and
any rating starting with “A” signifies reasonably high quality debt.
Three letter ratings starting with “B” such as BAA or BBB indicate
lower quality debt than “A” ratings, but don’t signal significant
risk. Two letter “B” ratings such as “BB” or “Ba1” signify
“non-investment grade” securities. Single letter “B” ratings
such as “B1” are considered highly speculative, and any “C”
rated bond is considered to have substantial risk. The agencies also
evaluate the overall credit quality of the company using the same rating
system. You can see a summary of the ratings issued by each major agency
by going to Bonds Online (www.bondsonline.com)
and selecting Bond
Rating Definitions in the Fixed Income Research Center on the menu
on the left.
Moodys
Makes It Easy
Moodys.com (www.moodys.com) is the
easiest place to find bond and corporate credit ratings because you can
look up the ratings using the corporation’s stock ticker symbol. For
instance, enter Amazon.com’s ticker symbol (AMZN) into the Quick
Search box near the top of Moody’s Advanced
Search page and select Ticker from the dropdown menu to see the report
for Amazon. Scroll past the Research Links to the Analyst and Rating
Information section. The most recent bond ratings (LT for long-term, and
ST for short-term) are listed on the right. When I looked last week,
only a long-term bond rating, “Caa1” corresponding to “substantial
risk,” was listed. You can scroll further to the “Current Rating
List” to see all of the company’s bonds rated by Moody’s. In
Amazon’s case, eight different bonds were listed, all with ratings of
“Caa1” or “Caa3 (worse than Caa1).” I avoid stocks with single
letter “B” ratings, and all forms of “C” ratings. Scan through
the bond list because occasionally you’ll find links to detailed
company analysis in this section.
Bonds
Online
Bonds Online is another source
of bond ratings. Select Corporate
Bonds in the Bond Search/Quote Center menu on the right, and then
type the company name into the “Issue” box under Express Search. You
may have to try different variations of a company’s name to find a
listing. For instance, I had to use “Amazon” rather than “Amazon.com”
to find the its bond listings. Bonds Online lists both Moody’s and
Standard & Poor’s ratings, if any, for the bonds it finds. The
ability to list ratings from two major services should make Bonds Online
ta better resource than Moody’s, but many times I’ve found ratings
listed on Moody’s that I didn’t find on Bonds Online.
Standard
& Poor’s
Standard & Poor’s site (www.standardandpoors.com)
is another source of rating information, and often the best source for
analysts’ detailed reports. Unfortunately, the reports are hard to
locate. I’ve had the most success finding reports using the “Search”
tab at the top-right of S&P’s homepage.
Recent
Ratings Changes
Both Moody’s and Standard & Poor’s make lists of ratings changes
made within the last few days easily accessible from their homepage.
These reports include a detailed explanation of the reasons for the
change and make for interesting reading. For instance, an S&P
February 14, report on paging service operator Arch Wireless’ (select Ratings
News, and then click on Corporate
Finance) voiced concerns about the company’s ability to meet
existing debt requirements. S&P commented that Arch’s traditional
one-way paging business was subject to” ongoing price and margin
erosion” and a declining customer base, and said prospects were
uncertain for the company’s advanced two-way messaging services. This
is information anyone considering Arch Wireless would want to know.
You won’t
find ratings for all companies, since many, especially new companies,
raise funds by selling stock rather than by borrowing. However, rating
agency reports are the most objective available, and you will be
surprised at how often you do find information of interest.
published 3/5/01 |
